Hello. This is Attorney Youngkyung Lee of Law Firm Cheongchul.

In this article, we will examine the franchise business law violations by The Keun Co., Ltd. that were recently sanctioned by the Fair Trade Commission. This case shows that even if a contract is titled an “Entrusted Operation Management Agreement,” if its actual substance constitutes a franchise agreement, the parties must still bear all obligations, including the duty to provide a disclosure document, the duty to provide the franchise agreement in advance, and the duty to include mandatory provisions. In other words, the key point is that whether the Franchise Business Act applies is determined not by the contract title, but by the substance of the contract.

Please note that this column is based on the Fair Trade Commission’s press release, and the details of the final disposition may change depending on court rulings through appeals by the parties.

[Question]

If a franchisor names the contract an “Entrusted Operation Management Agreement,” can it avoid the obligation to provide a disclosure document or the obligation to provide the franchise agreement in advance?

[Answer]

No, it cannot. The Fair Trade Commission found that the “Entrusted Operation Management Agreement” entered into by The Keun Co., Ltd. was, in substance, a franchise agreement under the Franchise Business Act, and issued corrective orders for failure to provide the disclosure document, failure to provide the franchise agreement in advance, and omission of mandatory provisions. Ultimately, the core of this measure is that whether an agreement is a franchise agreement is determined by its substance, not its name.

1. Facts

According to the press release, in 2023 The Keun Co., Ltd. entered into an “Entrusted Operation Management Agreement” with a prospective franchisee and entrusted it with operating “The Keun Table,” a food court at Seoul Medical Center. However, the Fair Trade Commission determined that this agreement was not a simple operation entrustment but rather had the substance of a franchise business agreement. The Keun allowed the franchisee to use its trade name, “The Keun Table”, and distributed food-court recipe manuals so that food would be prepared and sold according to uniform quality standards. It also provided finance, publicity, marketing, and practical cooking training, and controlled business activities such as ingredients, cooking methods, and attire. In addition, it collected 3% of monthly sales as headquarters management fees and established a contractual relationship for a fixed period.

Nevertheless, The Keun did not provide a disclosure document to the prospective franchisee, entered into the contract without providing the franchise agreement in advance, and provided a contract that omitted some mandatory provisions. Accordingly, the Fair Trade Commission recognized violations of the duty to provide a disclosure document, the duty to provide a franchise agreement, and omission of mandatory provisions in the franchise agreement, and imposed a cease-and-desist order for future conduct and an order to conduct training.

2. Issues and Relevant Law

There are two key issues in this case. First, whether the “Entrusted Operation Management Agreement” constitutes a franchise agreement under the Franchise Business Act. Second, if it does constitute a franchise agreement, whether failing to provide the disclosure document and franchise agreement in advance and omitting mandatory provisions violate the law.

The press release presents five requirements for the establishment of a franchise business: (1) use of business marks, (2) uniform quality standards or business methods, (3) support, training, and control by the franchisor, (4) payment of franchise fees in return, and (5) a continuous transactional relationship. The Fair Trade Commission found that The Keun’s contract satisfied all five requirements. In addition, under Article 7(3) and Article 11(1) and (2) of the 「Act on Fairness in Franchise Transactions」, a franchisor may conclude a franchise agreement or receive franchise fees only after providing the disclosure document and a franchise agreement containing mandatory provisions in advance and allowing a prescribed period to pass.

3. FTC’s Judgment and Implications

The most important message of this case is clear: whether an agreement is a franchise agreement is determined not by the title of the contract, but by its actual contents. Even if the contract is labeled differently as “entrusted operation,” “operation agency,” or “management agreement,” the Franchise Business Act may still apply if, in reality, it permits brand use, standardizes business methods, provides training and control, receives consideration, and forms a continuous transactional relationship.

Also, the obligations to provide a disclosure document and franchise agreement in advance are not merely formal regulations. They are mechanisms designed to ensure that prospective franchisees can sufficiently review and carefully assess the brand structure, cost burdens, operating conditions, contract term, and grounds for termination before entering into a contract. Therefore, omitting these obligations or attempting to circumvent them formally may result in sanctions by the Fair Trade Commission.

Ultimately, this Fair Trade Commission sanction demonstrates that when designing a contract structure, franchisors must prioritize substance over form. Franchisors cannot avoid obligations under the Franchise Business Act merely by using the name “Entrusted Operation Management Agreement,” and prospective franchisees also need to closely examine the actual operating structure and profit structure rather than relying only on the contract title. This case clearly confirms in franchise law practice that contractual substance is more important than contractual title.